Investment Income CPD Course  

Why income growth is hard to come by in the UK

  • To understand the outlook for income in the UK.
  • To ascertain where on the market cap investors can find good equity income.
  • To be able to explain what sort of diversification can help provide robust income streams.
Why income growth is hard to come by in the UK

Nineties musical sensation D.Ream's "Things can only get better" may seem to ring true for many aspects of life.

But it is increasingly become difficult to apply the same principles to the outlook for income in the UK. 

Experts have warned that you only have to look at dividend growth, the low yields on government bonds, and the poor return on cash interest to notice the environment looks bleak. 

This plight has been highlighted by Rob Argent, portfolio manager for Allianz Global Investors, who says: “Given the prospect of rate normalisation and increasing inflation expectations, it is a challenging time for income investors.

"On the fixed income side, it can be difficult to achieve inflation beating total returns without moving further out on the risk curve.  

"Funds that offer exposure to the most liquid, sterling denominated, investment grade corporate bonds are attractive, given their historically stable performance and yield pick-up versus government securities.

"Given that the recent spike in market volatility shows signs of market complacency, and considering where we are in the economic cycle, investment grade should outperform high yield."

Large or small?

William Meadon, portfolio manager of JP Morgan Claverhouse Investment Trust, agrees that 2018 dividend growth is likely to be more sluggish than 2017’s excellent growth. 

He adds: "This can be attributed to many companies with US exposure facing FX headwinds from the weakening dollar versus the pound. With 40 per cent  of UK dividends paid in dollars then currency alone at current exchange rate ($1.41) will take 4 per cent off 2018 dividends.

"With the domestic economy slowing and the UK just over 12 months away from leaving the EU, special dividends are also likely to be less plentiful in 2018."

So, it comes as no surprise that investors are now raising questions on how best to find income in the UK. This is particularly true of pensioner clients who might need income-generating investments in retirement. 

Ashley Owen, associate director for financial planning at London-based AES International, believes that financial advisers must fully understand their clients' tolerance for risk, when deciphering how best to look for income in the UK.

He states: “Their risk tolerance will dictate which assets classes could be appropriate for their income producing investment portfolio.

"In a very broad sense, those with a higher risk tolerance might look at earning dividends from equities – and those at the other end of the risk spectrum might look at earning from fixed-income securities – such as interest payments from bonds.”

According to Mr Owen, generally speaking, larger companies are more likely to offer healthy yields given that they will have established businesses and stable income, which lends itself well to management deciding to return capital to shareholders.